The commentary presents data on countries’ GDP per capita relative to US GDP per capita. It show that only two countries – Luxembourg and Norway – have higher levels.
GDP Across Countries
Real GDP or real Gross Domestic Product measures the volume of goods and service produced within a country within a particular period. One way to present such measures is in index form. The volume of goods and services produced in an arbitrarily chosen year, e.g. 2005, is defined as 100 and the volume produced in all other years is then measured relative to that year. So if the volume produced in 2006 were 3% higher than that produced in 2005 it would appear as 103; if it were 3% lower, 97; and so on.
If this is done for a number of countries then the index cannot be used to compare the level of one country’s GDP with that of another: the index will by definition be 100 in 2005 for a large economy such as the US and for a small one such as Luxembourg. So the fact that one country’s index is 106 in 2006 whilst another’s is 102 does not mean that the first country’s GDP is 4% larger than the second country’s. But it does mean that the first country’s GDP grew approximately three times faster than the second country’s between 2005 and 2006. Countries’ GDP indices can therefore be used to assess the relative GDP performance of two or more countries over time.
To compare levels of real GDP across countries an exchange rate is required to convert data in one currency to that of a common currency such as the US$. Exchange rates can be highly volatile so using the exchange rate in operation in each period can produce unrealistically sharp fluctuations in relative GDPs. For their comparison of GDP per capita the OECD use so-called purchasing power parity exchange rates. These are what the exchange rates would need to be to ensure that prices of goods and services in in one country were the same as in another when converted into a common currency.
To take a simple example: if the US produced 100 units per capita of a good at a price of $10 its nominal GDP per capita would be $1000; and if the UK produced 10 units per capita of the good at a price of £5 its nominal GDP per capita would be £50. For the good to be sold in the UK at the same dollar price as it is in the US the exchange rate (= number of £s equal to one $) would need to be 0.5. Using this exchange rate the UK’s nominal per capita GDP would equal $100. The ratio of the UK’s nominal per capita GDP to that of the US would then be 10. And this is the true ratio of the UK’s per capita output of the good to that of the US’s: 100 to 10. If the actual exchange rate were to diverge from its purchasing power parity value – and exchange rates often do – then the calculated value would diverge from its true value. Of course in reality the picture is more complicated because not only do countries typically have different currencies they also produce different bundles of goods, but attempts to use purchasing power parity exchange rates which take account of this provide a better comparison of GDPs in different countries.
The graph shows the OECD measure for the UK. It indicates that UK GDP per capita is around 75% of the US equivalent, that it showed a noticeable upward jump in the early 2000s but has generally declined since 2008.